A Search-Equilibrium Approach to the Micro Foundations of Macroeconomics

Abstract

This book presents the second in the renewed Wicksell Lecture Series, sponsored by the Swedish Economic Association. In it, Peter A. Diamond discusses search equilibrium as a framework for integrating micro and macroeconomics. He first presents a formal model which addresses the difficulty and cost of coordinating trade (finding a trade partner) and notes the impact of costly trade coordination on production decisions. He then relates the model to the existing literature, and discusses micro data supporting a search approach.Diamond incorporates the real-world fact that, contrary to the assumption of classical markets, the resource allocation process takes time and is hard to coordinate, and he argues that this fact is important for developing a sound theoretical basis for macroeconomic policy. Rather than being a rival theory, he argues that search equilibrium provides a promising basis for thinking about price and wage stickiness. Moreover, unlike standard rational expectations competitive models, Diamond's search model identifies multiple natural rates of unemployment, offering the potential for good and effective policy.

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